Derivatives: Futures & Options (Basics)

Derivatives are financial instruments whose value is derived from an underlying asset (Stock, Index, Commodity, Currency).

Think of it as a Contract to buy or sell something at a future date at a pre-agreed price.

1. Futures

A Futures Contract is an agreement to buy or sell an asset at a predetermined price on a specific future date.

Example:

• Today: Nifty is at 20,000.
• You buy 1 Nifty Futures contract at 20,000 expiring on 30th Nov.
• On 30th Nov:
  • If Nifty = 20,500, you make ₹500 x 50 (Lot Size) = ₹25,000 profit.
  • If Nifty = 19,500, you lose ₹25,000.

Key Features:

• Leverage: You don't pay ₹10 Lakhs to buy Nifty. You pay only Margin (~₹1.5 Lakhs).
• Obligation: You MUST settle the contract (Buy/Sell) on expiry.
• Mark to Market: Daily settlement. If the market moves against you, you get a margin call.

2. Options

An Option gives you the Right (but not the obligation) to buy or sell.

A. Call Option (Right to Buy)

• Buyer: "I want the right to buy Reliance at ₹2,500 anytime before 30th Nov."
• Premium: Pays ₹50 upfront.
• Scenario:
  • If Reliance = ₹2,700, he exercises the option. Profit = 200 - 50 = ₹150.
  • If Reliance = ₹2,300, he lets it expire. Loss = ₹50 (Premium).

B. Put Option (Right to Sell)

• Buyer: "I want the right to sell Reliance at ₹2,500."
• Profits if the stock falls.

3. Futures vs Options

4. Why Use Derivatives?

1. Hedging: Protect your portfolio from downside.
   • You hold 100 Infosys shares. Buy Put Options to protect against a crash.
2. Speculation: Bet on direction with leverage.
   • You think Nifty will rise. Buy Futures with small capital.
3. Arbitrage: Exploit price differences between Spot and Futures.

5. The Dangers

• 95% Retail Traders Lose Money in F&O.
• Leverage is a double-edged sword. A 2% move against you = 20% loss on margin.
• Time Decay (Options): Every day, the premium erodes.
• Assignment Risk (Options): You may be forced to buy 1,000 shares if you sell a Call.

7-Day Action Plan

Day 1: Open NSE website. Check the Nifty Futures price vs Spot price. Understand "Premium" or "Discount".
Day 2: Watch a YouTube video on "Call vs Put Option with Examples".
Day 3: Understand "Strike Price", "Premium", and "Expiry Date".
Day 4: Read about "In the Money (ITM)", "At the Money (ATM)", and "Out of the Money (OTM)".
Day 5: Go to Zerodha Varsity and read the F&O module (Free, Best resource).
Day 6: Paper trade (Virtual money) on Sensibull or Opstra for 1 month before risking real money.
Day 7: Understand SEBI's rule: Only those with income > ₹25 Lakhs or Net Worth > ₹50 Lakhs should trade F&O.

Quiz

💡 Final Wisdom: "Derivatives are weapons of mass destruction." — Warren Buffett. Use them only if you understand them fully.